- The broader Tech sector sell-off appears to be bottoming with Hedge Funds resuming their buying
- Nvidia's 2Q24 earnings on 28 August could be the catalyst for the return of market optimism about the sector
- ASML is trading at a 20% discount to ATH and at 31x PE (10% discount to 5Y average), which we see as an AI play in Europe to take advantage of the rebound
As mentioned in our recent weekly note Is this what panic looks like? the Nasdaq has retraced 15% since its peak, bouncing off the 200MA and the bottom of the rising channel (Figure. 3), and appears to have established a base with a potential for a reversal of the move, as peak panic may be behind us and absent any further escalation of the Middle Eastern conflict. Hedge funds, which had been selling the Tech sector before the sell-off, have now started buying back into Tech stocks, marking a potential bottom with risks now more attractive to the upside. Following the sell-off, market gamma is now estimated at a negative c.USD2bn, which could fuel the upside move.
The market focus in August will be on Nvidia's 2Q24 earnings on 28 August, given the majority of earnings in the US and Europe will be out of the way and we see a similar set up with our previous trade idea ASML: Long June 24 920 calls –Risks to the upside from AI trade reignition after which ASML posted a 15% increase following NVIDIA’s strong results. The implied 1D move is currently at 10%, which is not a major premium to the average earnings move of 9%, although regardless it remains of particular interest given the size of the implied move in absolute USD terms. We think the broader AI trade could resume should NVIDIA once again beat market expectations (Figure 6) providing the catalyst for continued optimism surrounding the sector.
ASML is still the only relevant AI play in Europe and has been trading 20% off its all-time high underperforming the broader Tech sector YtD (Figure. 2). Following the recent broader market sell-off, both NVIDIA and ASML are trading at PEs of 32x and 31x respectively (Figures. 4 and 5), at significant discounts to their peak ratings and at the lower end of the 3Y range, which we believe is supportive of short-term upside.
In terms of volatility, 3M ATM IV (Figure 7) is currently rich at a 1YPc99 and at 2YPc85, swaying our thoughts of playing the upside via Sep24 840/880 call spreads at a net cost of 1.37% of underlying (spot ref: 794.3). Should the spot price tick through our price target by expiration the strategy would return 3.7x on the premium employed.